Latest government reshuffle not likely to improve plight of Russian oil and gas industry

Aug 10, 1999 02:00 AM

by Jennifer DeLay

When Sergei Stepashin became prime minister in May of this year, there was reason to assume that he might outlast his predecessor, Yevgeny Primakov.
Stepashin was closer to President Boris Yeltsin than Primakov. He was also viewed as more likely to kowtow to Yeltsin -- unlike former KGB master Primakov, who commanded a certain respect of his own among the opposition.
Nevertheless, Yeltsin seems to have tired of his prime minister. The president unceremoniously booted Stepashin out of the Kremlin on Monday, August 9, and nominated Vladimir Putin -- the little-known and scarcely distinguished head of the Federal Security Service (FSB), the successor to Primakov's KGB -- as his successor.

This scenario is becoming all too familiar: Like Primakov, Stepashin was sacked almost as soon as he began to make a little headway on dealing with the messy consequences of last year's ruble devaluation and financial market collapse. Familiar or not, however, the firing seems to have comeas a surprise for most of the Western analysts asked to comment by major press agencies. Some of the Russian citizens interviewed, by contrast, merely shrugged and made remarks about needing no further proof of Yeltsin's senility.
Yeltsin claimed that this latest lurch of the political merry-go-round would turn out right in the end. The 46-year-old Putin, he said on August 9, is the best man to lead Russia into the 21st century. The security chief has already announced plans to seek the presidency next year.
It is of course an open question whether Putin will last long enough to run for president. It can safely be predicted, however, that the dissolution of the government will have serious consequences for the oil and gas sector.
Russia's hydrocarbon industry has suffered shock after shock over the last 10 years. After the collapse of the USSR in 1991, the industry lost many of its old state subsidies, and the oil monopoly was transformed into a motley collection of vertically integrated companies. (However, Gazprom, set up in the late 1980s to succeed the Soviet Gas Ministry, survived in roughly the same form.) Many of the oil companies are now controlled by financial-industrial groups. Taxes are high, investments are insufficient, equipment and infrastructure are crumbling, and sustained production increases are rare.
Stepashin and his predecessors have talked a lot about solving these problems, not least because oil and gas account for about half of all the revenue the government collects in any given year. However, their actions have not been in proportion to their words. Russia still doesn't have the effective production-sharing legislation it needs to attract foreign investment into the sector. The tax system is still confusing. Foreign creditors have lent Russian oil companies a total of $ 5 billion, according to a report submitted to the cabinet by the Fuel and Energy, but these companies' wells and rigs are still rusting and -- for the most part -- production levels are still not rising.
In short, Putin has a big problem on his hands. Like his predecessors, he will have to find a way to keep the country's most lucrative industry afloat or face the consequences of a serious dip in tax revenues. Furthermore, he will likely have a difficult time coping with the sector's more immediate problems -- such as the current gasoline crisis -- because he will have to take the time to install a new cabinet.
It cannot be ruled out that Russian oil companies may see the latest outbreak of political chaos in the Kremlin as a golden opportunity to push crude exports back up. This would exacerbate the fuel shortages racking many regions of the country, cut into revenues by placing downward pressure on world oil prices and also erode trust in the government, which is already at a low level. This in turn might well inspire Yeltsin to announce yet another well-timed government reshuffle.

Source: NewsBase
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